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Recent trends in balance of payments
1. RECENT TRENDS IN BALANCE OF
PAYMENTS
A comparative study of past 10 years in the trends of
Balance of Payments of India .
2. INTRODUCTION
Definition given by IMF (International Monetary
Fund) is as follows
“The balance of payments is a statistical statement
that systematically summarizes, for a specific time
period, the economic transactions of an economy
with the rest of the world. Transactions, for the most
part between residents and nonresidents,1 consist
of those involving goods, services, and income;
those involving financial claims on, and liabilities to,
the rest of the world; and those (such as gifts)
classified as transfers, which involve offsetting
entries to balance in an accounting sense one-
sided transactions”.
3. BALANCE OF PAYMENTS COMPONENTS
1. The Current Account
2. The Capital Account
3. The Official Reserves Account
4. Statistical Discrepancy
4. COMPONENTS OF CURRENT ACCOUNT
All imports and exports of merchandise/goods
All imports and exports of services
All income receipts and payments (from
investments)
All unilateral transfers of foreign aid
If the debits (imports) exceed the credits (exports),
then a country is running a trade deficit and if the
credits exceed (exports), the debits (imports), then
a country is running a trade surplus.
5. The capital account is
part of a
country's balance of
payments. It measures
the net difference
between India’s sales of
assets to foreigners and
India’s purchases of
foreign assets.
Capital Account
Components
The capital account is
composed of:
Foreign Direct Investment
(FDI)
Portfolio investments
Other investments.
Official reserves assets
include:
Gold
Foreign currencies
Special Drawing Rights
(SDRs) – a reserve
positions with the
International Monetary
Fund (IMF)
Components of Capital account Components of the Official
Reserves Account
6. There’s going to be
some omissions and
misrecorded
transactions—so we
use a “plug” figure to
get things to
balance.
The IMF prescribes
Balance of
Payments to be
recorded in Double
entry system. All
transactions are
either debit or credit
transactions
Statistical Discrepancy Disequilibrium in Balance of
Payments
7. DEBIT AND CREDIT TRANSACTIONS
Credit transactions result
in receipt of payment
from foreigners
Merchandise exports
(valued f.o.b.)
Transportation and travel
receipts
Income received from
investments abroad
Gifts received from
foreign residents
Aid received from foreign
governments
Debit transactions involve
to payments to foreigners
Merchandise imports
Transportation and travel
expenditures
Income paid on
investments of foreigners
Gifts to foreign residents
Aid given by home
government
Overseas investments by
home country residents
8. CONDITION OF THE DOUBLE ENTRY SYSTEM
In a double entry method of accounting,
each credit transaction has a balancing
debit transaction, and vice versa, in the
BOP, so for the balance of payments to
be in Equilibrium the current and capital
accounts must sum to zero.
9. CAUSES OF DISEQUILIBRIUM IN BOP:
There are several factors which cause
disequilibrium in the BOP indicating either surplus
or deficit.
Economic Factors
Imbalance between exports and imports, Large scale
development expenditure which causes large imports etc.
Political Factors
New laws passed restricting imports like anti dumping duty
etc.
Social Factors
Changes in fashions, tastes and preferences of the people
bring disequilibrium in BOP by influencing imports and
exports, High population growth in poor countries etc
10. MEASURES TO CORRECT DISEQUILIBRIUM IN
BOP
Following remedial measures are recommended
(i) Export promotion:
Exports should be encouraged by granting various bounties to
manufacturers and exporters. At the same time, imports should be
discouraged by undertaking import substitution and imposing
reasonable tariffs.
(ii) Import:
Restrictions and Import Substitution are other measures of
correcting disequilibrium.
(iii) Reducing inflation:
Inflation (continuous rise in prices) discourages exports and
encourages imports. Therefore, government should check inflation
and lower the prices in the country.
11. (iv) Exchange control:
Government should control foreign exchange by ordering all
exporters to surrender their foreign exchange to the central
bank and then ration out among licensed importers.
(v) Devaluation of domestic currency:
It means fall in the external (exchange) value of domestic
currency in terms of a unit of foreign exchange which makes
domestic goods cheaper for the foreigners. Devaluation is
done by a government order when a country has adopted a
fixed exchange rate system. Care should be taken that
devaluation should not cause rise in internal price level.
(vi)Depreciation:
Like devaluation, depreciation leads to fall in external
purchasing power of home currency. Depreciation occurs in a
free market system wherein demand for foreign exchange far
exceeds the supply of foreign exchange in foreign exchange
market of a country (Mind, devaluation is done in fixed
exchange rate system).
13. The Table given below gives the position of India’s balance of
payments on current account for the years 2007-08 to 2012-13.
14. Due to surplus in invisibles account, there was a surplus on
current account during 2001-2002, 2002-03 and 2003-04. In
India’s balance of payments on current account from 2004-05
onwards there has been a deficit.
Due to global financial crisis in 2008-09, there was a large
deficit of 2.4 of per cent of GDP on current account .
In 2011-12, the current account deficit was 4.2 per cent of
GDP.
In the year 2012-13 the current account deficit has been
estimated to be even higher at 4.8 per cent of GDP, capital
inflows through portfolio investment by FIIs had picked up in
the latter half of 2012-13 but capital inflows through FDI had
fallen. However, we managed to meet such large account
deficit through capital inflows. In fact we added to our foreign
exchange reserves by $3.8 billion in 2012-13.
15. The India’s balance-of-payments (BoP) position improved
dramatically in 2013-14, particularly in the last three
quarters.
Current account deficit (CAD) declined sharply from a
record high of US$ 88.2 billion (4.7 per cent of gross
domestic product [GDP]) in 2012-13 to US$ 32.4 billion
(1.7 per cent of GDP) in 2013-14.
This is because even as CAD came down, net capital
flows moderated sharply from US$ 92.0 billion in 2012-13
to US$ 47.9 billion in 2013-14
16. Credit Debit Net Credit Debit Net Credit Debit Net
Current account 125219 125496 -277 126572 132749 -6177 139184 147021 -7837
Capital account 221 65 156 84 76 8 138 121 18
Financial account 128935 128978 -42 140181 133560 6622 147126 138515 8610
Net errors and ommissions 164 164 453 -453 791 -791
Goods and services 106147 114211 -8064 106070 122843 -16774 110431 144047 -33616
Primary income 3768 9968 -6200 3228 8800 -5573 2345 9039 -6694
Secondary income 15304 1317 13987 17275 1105 16170 17559 1123 16436
Direct Investment in India 11749 5852 5897 14159 2680 11478 10247 1957 8291
Direct Investment by India 2425 4234 -1809 1321 2622 -1302 1562 1685 -123
Portfolio Invesment in India 56260 55020 1241 62575 65318 -2742 68858 56393 12465
Portfolio Invesment by India 1681 818 863 260 93 167 169 194 -25
Financial derivatives (other
than reserves) and employee
stock options
6861 3988 2872 1344 4594 -3250 6008 3996 2012
Other investment 49960 52097 -2137 60523 46822 13701 60281 63111 -2830
Other equity (ADRs/GDRs) 0 0 0 273 0 273 0 0 0
Currency and deposits 11600 10195 1405 16922 11313 5610 15212 12708 2504
Other accounts receivable/payable 2536 2622 -86 4709 516 4192 2054 6630 -4575
Special drawing rights 0 0
Reserve assets 0 6969 -6969 0 11430 -11430 0 11179 -11179
Total assets/liabilities 128935 128978 -42 140181 133560 6622 147126 138515 8610
Apr-Jun 2016 P Apr-Jun 2015 P April-June 2014 P
17. In the quarter April-June 2014, the current account
showed a net deficit of US$ 7837 Million. The good and
services account showed a deficit of USD 33616 Million.
The primary income showed a deficit of US$ 6694
Million. Whereas, the secondary income showed a
surplus of US$ 16436 Million. The direct investment in
India showed a surplus of US$ 8291 Million. The capital
account showed a surplus of US$ 18 Million. The
portfolio investment account showed a US$ 12465
Million.
18. In 2015 the current account showed a deficit of US$ 6177
Million yet showing a considerable improvement
compared to thr previous quarter where the current
account deficit was US$ 7837 Million out of which the
goods and services account showed a deficit of
US$16447 Million
The capital account showed only a net surplus of UD$ 8
Million which considerably declined compared to the
previous year where it was US$ 18 Million.
The direct investment in India showed a negative balance
depicting a deficit of US$ 1302 Million. The portfolio
investment account also showed only a deficit of USD
2742 Million being considerably less than the previous
year 2014.
19. In the quarter April-June 2016, the net difference
between the credit and debit of current account is -
277 showing a deficit of US$ 277 Million.
The capital account showed a surplus of US$ 156
Million improving its position considerably from last
year.
The Goods and services exchanges shows a deficit
of US$ 8064 Million as compared to the previous
quarter when US$ 16774 Million of deficit was shown.
The primary income showed a deficit of US$ 6200
Million where as the secondary income account
showed a US$13987 Million.
The direct investment in India increased in the
previous quarter showing a credit balance of US$
5897 Million.
The portfolio investment in India also showed a
positive trend as the account showed a surplus of
US$ 1241 Million. Balance of payments entirely
showed a positive trend when compared to 4th
quarter of 2015 i.e. April-June.
20. CONCLUSION
Overall balance of payment is the sum of
balance of current account and balance of
capital. It includes all monetary transactions of
the reporting country vis-à-vis the rest of the
world. The balance of payments must always
balance in a book keeping sense. This is
because for any surplus (or deficit) in the
overall balance of payments there must be a
corresponding debit(or credit) entry in the net
changes in external reserves. In other words, if
there is a surplus it adds to external reserves of
the country and if there is deficit, it reduces
down the external reserves of the company.
